Don’t say it out loud (seriously, don’t, unless you want to get called in for a “corrective” meeting with Party officials), but China’s freezing economically. And if you think Xi Jinping’s totalitarian rule constitutes a kind of hell, well then hell’s freezing over.
Holiday-distorted data released on Sunday showed that both CPI and core CPI were negative in February, along with producer prices, which spent a 29th month in deflation.
If you’re wondering whether this was expected, the answer’s both “yes” and “no.” Economists knew headline prices would likely fall on a 12-month basis for the first time in over a year, but they didn’t anticipate the scope of the drop, 0.7%. Nor did they expect a negative print on the core measure.
Do note: Negative core CPI prints in China are exceedingly rare, where that means they basically don’t happen. But anything’s possible when you’re as determined as Xi is to f-ck everything up. (Sorry, that’s not very analytical. But it’s funny!)
Again, it’s important to note that a lot of this was the base effect. The Lunar New Year holiday impacts China’s January-February data in different ways depending on when it falls during a given year, and that was a factor. Here’s what the NBS had to say on Sunday:
The main reasons for the CPI turning from positive to negative in February are as follows: First, the Spring Festival was in a different month, resulting in a higher comparison base. In February last year, food and service prices increased more, raising the comparison base in February this year, resulting in a negative YoY impact. Excluding the impact of the Spring Festival in a different month, the CPI rose by 0.1% YoY in February, and the current trend of a mild rebound in prices has not changed.
That’s all fine and good, but I’m not sure I’d describe 0.1% YoY headline price growth (the NBS’s holiday-adjusted estimate) as evidence of a “rebound,” “mild” or otherwise.
Also, I’m compelled to note that economists knew about the base effect from the holiday date shift ahead of time, and presumably tried to incorporate that into their forecasts. So, the downside surprise on the consumer price aggregates suggests that even when you control for the holiday shift, the disinflation impulse was stronger than expected last month.
The underwhelming readout comes on the heels of dispiriting trade figures for January and February which showed imports contracted nearly 9%, a dramatically bad result that likewise suggested Beijing’s efforts to revive domestic demand are ineffectual.
At the NPC, officials said inflation this year should run 2%. That’s a concession to… well, to reality. They would’ve much rather said 3%, but that ain’t gonna happen, and indeed, 2%’s likely to be an uphill battle. It’s amusing that Chinese policymakers are struggling to lift consumer price growth to 2% just as the Fed’s struggling to lower consumer price growth to that same 2%.
I’ll leave you with an entertaining quote from Howard Lutnick, who regaled CNBC’s Joe Kernen with an exclaim-a-thon last week:
Tariffs do not, do not, do not create inflation! A government printing money creates inflation. If you have a balanced budget there can’t be inflation. China has the highest tariffs in the world — in the world! — everything gets tariffed in China and they don’t have inflation. In fact, they have deflation. So this concept is just people whining and complaining and not being truthful.
Maybe Lutnick is right – maybe tariffs will do enough damage to the economy to offset the increased costs.
I don’t think there is a word that properly describes the level of stupid that we are witnessing. I’m surprised how slowly the market is taking to figure that out. Maybe they all think they’ll be in on the joke and laughing all the way to the bank, but the crazy train has left the station, the doors are locked, and we’re all stuck aboard as we accelerate toward a giant ravine.
Lutnick is right-tariffs are a one shot tax. What he leaves out is that they lower the standard of living for most people and have awful second and third order effects when other countries retaliate on your exports
The idea that tariffs are a “one-time” inflation impulse is as wrong as the idea that Covid inflationary was “transitory”.
The wrongness is the timescale.
Yes, over several years, both may be one-time. But that is not a short time; that’s enough time for political and financial fortunes to reverse and popular attitudes to change.
Covid was like a giant rock thrown into a pond. The reverberating knock-on and second order effects are still roiling the economy four years xv later.
Trump-style tariffs are like multiple giant rocks being thrown in the pond, fished out, thrown back in, meanwhile all the other kids are angrily throwing their own giant rocks.
If the economic damage is big enough, inflation impulse may be replaced by deflation over the coming years. I suppose Trump, Lutnick, Bessent, et al will try to spin that as success. I’m sure that far too many Americans are stupid enough to believe them. But, like like in Congress, the Reps’ electoral margin is very thin. If 5% of Trump voters flip, that’s a reverse landslide.
If 1in 57 Trump voters had voted for Harris, she’d have won. The margins were small, but the playing field was fairer than it will be next time.
I’ve read that upwards of 90 million voting age voters did not vote out of a total estimated 245 million voting age people, more potential voters than either Trump or Harris garnered. This non voting block has held basically true for the past 4 presidential elections. Both parties have basically lost to “both candidates suck” consistently.
I can’t remember the last time I voted “for” a candidate versus voting “against” the opponent. I am not sure why anyone in their right mind would want to aspire to this office frankly.
Unless the Electoral College is abolished there is an excellent chance that the next president will not be chosen by the majority.
So given the high level of accuracy and integrity the Chinese are well known for in their statistical releases, what do you think the real numbers were?
I would just add that tariffs or the pandemic or shrinkage or whatever underlying justification there is to raise prices, I don’t think it’s appreciated how much consumer inflation expectations and seller expectations of being able to pass through higher costs are increased merely by prices suddenly become dynamic whether up or down. Once prices start to change meaningfully – up, up, then back down because too high – both consumers and producers begin to accept that prices can and will be fluid, regardless of whether it is actually justified. That’s a big dam break right there, especially in a country in which consuming is a stand in for freedom, cuz using less of something that’s expensive is characteristically un-American.